Tackling tax dodges is a problem of will, not power

Posted by Andrew Leigh Mp48sc on December 22, 2014

I've got an op-ed in today's Business Spectator on why Joe Hockey shouldn't walk away from his promise to fairly tax multinational firms. It doesn't seem a big ask to make sure all companies pay their fair share.

Tackling tax dodges is a problem of will, not power, Business Spectator, 22 December

It’s rare to see stories about tax taking up the front pages of some of Australia’s biggest newspapers.

But then again, it is thankfully also rare to see a Treasurer slash almost $4 billion from foreign aid while simultaneously giving hundreds of millions of dollars back to multinational firms.

That’s what Joe Hockey did in his 2014 mid-year budget update by backing down on a promise made in November 2013, just after last year’s election.

Back then, the freshly-minted Treasurer promised to come up with a targeted rule stopping companies artificially shrinking their tax bills by loading up on debt and then claiming deductions for the interest paid.

We know this is a problem because Treasury and the Australian Tax Office told us so during Labor’s comprehensive crackdown on multinational tax in 2013.

Tackling corporate tax dodges is an ongoing challenge for governments. In the 1970s, Australian conservative governments notoriously lost between $3 and $6 billion in today’s dollars – a huge share of revenue at the time – to domestic tax avoidance schemes involving thousands of Australian companies.

This revenue streamed away through loopholes which were eventually closed only by two separate major tax act changes, the second following the Fraser-Howard Government’s public shaming by the Costigan Royal Commission.

To this day, the so-called ‘bottom-of-the-harbour schemes’ represent one of the most shameful periods of tax avoidance in Australian history.

Ending these tax dodges showed that government isn’t powerless in the face of bad behaviour by big corporates.

That was back in the days when Australia was a more closed economy. Reining in corporate tax dodging in a borderless, global economy poses a fresh set of challenges.

In a wide-open world, there is always somewhere new to hide. We should not doubt that some firms are taking advantage of globalisation to avoid contributing to the public goods we all rely upon.

Even big firms themselves are concerned about this. In a recent interview with the Australian Financial Review, Rio Tinto chairman Jan du Plessis was quoted as saying “too many multinationals are getting away with murder”. He also pointed out that: “tax regimes need to catch up with the consequences of globalisation”.

I couldn’t agree more.

A central principle of economics is that everyone responds to incentives. We can politely encourage corporations to be good global citizens and do the right thing, but ultimately it is the incentives that matter.

If tax systems create incentives for doing dodgy deals, then dodgy deals will get done. Likewise, if the financial framework supports honest dealing and a fair contribution by all, then big corporations will find less reason to stray from this path.

That’s why the Abbott Government shouldn’t walk away from its promise to stop the misuse of debt and deduction arrangements. They are passing up the opportunity to close a loophole in our system that make it easy for multinationals do the wrong thing.

Last November, the government promised a new a targeted anti-avoidance measure which would stop companies siphoning profits offshore. Now Joe Hockey is throwing up his hands and complaining it’s just too hard. He’s even attempted to deny ever making the promise in the first place; a sadly common refrain from Prime Minister Abbott and his ministers in recent months.

Time and time again, the government’s broken promises hurt the disadvantaged, but help the privileged.

Since coming to office, the government has taken billions of dollars from the most vulnerable, while giving back $1.1 billion to multinationals.

The Abbott Government is strong with the weak, but weak with the strong.

That’s not good enough.

As politicians and policymakers, we are the architects of the tax system that big corporations operate within. That means it is within our power to get the incentives flowing in the right direction to ensure they pay their fair share.

It isn’t power that Joe Hockey is lacking when it comes to closing debt and deduction loopholes. What he’s sorely lacking is will.